The Xchange Blog

The China Trade “War” Question

The not-quite-a-trade-war with China has already shaken the major indexes, and equity traders continue to worry over any indication from either President Trump or Chinese leader Xi Jinping that might create more waves for the markets. The Dow and S&P both fell by more than 2.5 percent in mid-March when President Trump first signed the most recent tariffs on steel and aluminum imports. You can see the drop below, as shown by the Direxion Daily S&P 500 Bull 3X Shares ETF (SPXL).

Trump Tariff Impact on S&P 500
Data Range: 1/15/2018 – 4/12/2018. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. 

This drop makes sense given that China and the U.S. are the top two import and export countries in the world, exchanging more than $3.7 trillion dollars in commodities and other goods between themselves and the rest of the world in the course of 2016. Wall Street’s initial reaction to new tariffs was predictably negative, but more interesting to us is the lack of consensus that has ensued. Subsequent mentions of more tariffs from both sides on everything from pharmaceuticals to soybeans has been met by a market that is bouncing around. Nobody is quite sure what to make of it.

Take a look at the action in the Direxion Daily FTSE China Bull 3X ETF (YINN) and Bear 3X ETF (YANG) over that span.

Up until April 10, the charts were largely range bound with a total lack of conviction. But you can see how the market is slowly coming to grips with the fact that, apart from the initial steel, aluminum, pork and produce tariffs, which together totaled only about $5 billion in taxable goods, the talk about a trade war has all actually been just that: talk.

While the potential for an actual, all-out trade war is not wholly impossible, unless either side wants to pull the global economy into something a lot worse, it’s unlikely that most of the draconian $100 billion tariffs will see the light of day.

China Still Has More Cards To Play

However, that doesn’t mean other factors at play won’t further upset the apple cart. China, for its part, is coming into the standoff from a position of growing influence in the region, with ambitions toward the world at large. The country’s recent launch of the petro-yuan, the first oil contracts priced in a non-USD denomination, is seen as a clear signal for its ambitions to turn the renminbi into an international currency. Couple that with an 8 percent drop in the value of the dollar from its 2018 high to the start of April, and China may find ways of leveraging this conflict to suit their global interests.

Further, since the formerly U.S.-backed Trans-Pacific Partnership (TPP) was nixed, China has made efforts to further establish trade agreements with neighbors in the region like Thailand, Philippines and particularly Australia. China has also sought out NAFTA-partner Canada and other nations struggling with President Trump’s protectionist predilections for potential trading partners looking for more in-roads to Asia.

The U.S. faces similar restraints on how wild it can get in a trade dispute. Despite its status as a global trade leader and top importing nation in the world, that title gets harder to defend when you’re frustrating your top trade partners in China and Mexico. In that same vein, following the termination of TPP, other nations began to circle their wagons and, in so doing, realized that they could get by just fine if not better without the U.S. influence. This has gone so well for them that it was recently revealed that President Trump had done an about-face on the TPP, which he lambasted during his campaign.

The picture for either country remains cloudy. Chinese businesses could either thrive or limp along depending on the implementation of further tariffs or the adoption of more diverse trading outlets. Major Chinese tech companies like Alibaba, Tencent and Baidu have the benefit of strong earnings and a lot of investment flooding into the economy.

All of this leads us here: strap in, this ride’s just getting started.

 

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Performance (as of 3/31/2018)

Ticker Fund Name   1 Mo % 3 Mo % YTD 1 Yr % 3 Yr % 5 Yr % S/I Inception Expense Ratio %
(Gross/Net)
SPXL   Daily S&P 500 Bull 3X Shares  NAV -8.80 -6.50 -6.50 35.66 24.67 34.48 27.89 11/5/2008  1.03 / 1.04 
Market Close -8.71 -6.86 -6.86 35.79 24.72 34.63 27.88
YANG   Daily FTSE China Bear 3X Shares  NAV -3.10 -17.01 -17.01 -59.4 -39.08 -48.81 -42.61 12/3/2009  1.18 / 1.09 
Market Close -3.40 -17.25 -17.25 -59.48 -39.10 -48.80 -42.61
YINN  Daily FTSE China Bull 3X Shares  NAV -1.88 -0.53 -0.53 71.36 -6.46 16.24 -1.38 12/3/2009  1.39 / 1.34
Market Close -2.53 -0.24 -0.24 71.63 -6.42 16.17 -1.38

* The Net Expense Ratio includes management fees, other operating expenses and Acquired Fund Fees and Expenses. If Acquired Fund Fees and Expenses were excluded, the Net Expense Ratio would be 0.95%. The Funds’ adviser, Rafferty Asset Management, LLC (“Rafferty”) has entered into an Operating Expense Limitation Agreement with each Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse each Fund for Other Expenses through September 1, 2019, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable, among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses). If these expenses were included, the expense ratio would be higher.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Returns for performance under one year are cumulative, not annualized. For the most recent month-end performance please visit the funds website at direxioninvestments.com.

Investing in a Direxion Shares ETF may be more volatile than investing in broadly diversified funds. The use of leverage by a Fund increases the risk to the Fund. The Direxion Shares ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged investment results and intend to actively monitor and manage their investment. The Direxion Shares ETFs are not designed to track their respective underlying indices over a period of time longer than one day.